Portfolio Management in New Drug Development - Innovation and Marketing in the Pharmaceutical Industry - page 100

Worth Doing?” scoring model for constructing portfolios that balance risk and
reward. In particular, Day ( 2007 ) suggests that firms across industries shy away
from risky, disruptive innovations in favor of incremental ones, stemming from a
risk averse attitude that can hamper long-term growth. We do not focus on the
extensive variations of scoring models and strategic guideposts which are available
for decision making such as the Diamond model (Ahn et al. 2010 ; Dvir et al. 2006 ;
Shenhar and Dvir 2007 ), but examine the literature on the evidence in favor of cer-
tain strategic choices.
In the pharmaceutical context, radical innovation represents investment in
developing NCEs/NMEs which involve higher risk as unproven APIs can be used.
Incremental innovation tends to utilize known APIs/molecules to develop drugs,
such that the hurdles for regulatory approval are lower. Another dimension that
differentiates radical from incremental innovation is the complexity/level of knowl-
edge about the mechanism of action and the corresponding a priori risk of failure.
Cancer drugs may be inherently more difficult to develop than anti-infective drugs,
for example. Hence, Wuyts et al. ( 2004 ) define radical innovations as those which
incorporate a substantially different core technology and provide significantly
greater customer benefits than previous drugs.

3.3.2.1 Does Radical Innovation Pay Off?

Lee ( 2003 ) studies the US pharmaceutical industry from 1920 to 1960 and identifies
two types of firms (innovators and imitators) which react differently to the radical
innovation in antibiotics in the 1940s. During that period, innovators hired more
biologists and other scientists than imitators, and introduced eight times as many
NCEs as did imitators between 1940 and 1960. As a result, Lee ( 2003 ) concludes
that “the innovators dominated in developing new drugs and the gap between inno-
vators and imitators steadily increased.”
Wuyts et al. ( 2004 ) examine the consequences of upstream interfirm agreements
on the performance of radical innovation, incremental innovation, and overall prof-
itability. They point out that the number of R&D agreements is less informative of
success than the diversity of programs and repeated partnering that fosters deeper
collaboration and knowledge transfer. The importance of radical innovation to long-
term profitability is highlighted based on data collected from 58 pharmaceutical
firms from 1985 to 1998, covering 991 R&D agreements.

3.3.2.2 What Types of Firms Have Invested in Radical Innovation?

Sorescu et al. ( 2003 ) study the characteristics of firms which introduce radical innova-
tions and the resulting rewards. Their data set is based on a census of innovations from
1991 to 2000 from the NDA Pipeline, a database of drugs administered by F-D-C
Reports, of which 380 out of 3,891 new products introduced were breakthrough or “rad-
ical” innovations, representing only 7 % of total drugs. The sample is a cross-sectional